Yesterday’s 1Q16 earnings release beat expectations on higherthan- expected interest income while other key business segments were fairly on target. There was sign of recovery at GENS but not good enough while the UK earnings were strong but may not last. Back home, various facilities, such as gaming floor at GITP are scheduled to start in 2H16 should help to escalate forward earnings. We maintain MARKET PERFORM with new price target of RM9.23/share.

1Q16 above. GENTING reported 1Q16 results, which beat expectations with core net profit of RM547.5m making up 28%/31% of house/street’s FY15 estimates. The main deviating factor is the stronger-than-expected interest income as the reported RM226.0m already made up 42% of our FY15 assumption of RM536.0m. Meanwhile, the core earnings were adjusted for c.RM300m forex translation loss, which was reported in its Investment and Other Business segment, arising from the recovery of MYR against USD, which resulted in a loss position for its cash and assets held in USD and SGD denominations. No dividend was declared as expected.

Earnings helped by Singapore and UK units. Sequentially, 1Q16 core profit rose 9% from RM500.1m despite revenue falling 4%, which was helped by GENS’ (Not Rated) earnings on better luck factor as well as a strong showing at Genting UK on the back of higher premiums business volume coupled with higher hold percentage. However, the upside was mitigated by the local casino which was hit by luck factor while GENP (UP; TP: RM10.60) was impacted by lower FFB volume by 37% on droughts.

... and interest income. On a YoY comparison, 1Q16 core earnings jumped 31% from RM418.9m in 1Q15 largely driven by interest income, which almost doubled to RM226.0m from RM117.1m previously. In fact, almost all business segments reported declining earnings at adjusted EBITDA level except the UK casinos as mentioned above which surged to RM98.7m from RM38.4m, due to strong premium business volume coupled with the weakening of MYR effect.

Challenges in near term, especially for GENS which witnessed continued decline in VIP business volume. However, we remain positive on RWG due to its stable earnings while the development under GITP should likely turn the hilltop resort into a main holiday attraction in the region. Meanwhile, the North American operations should improve further as new Resort World Bimini has shown improvement in the recent quarters while the UK operations could be volatile due to its VIP-centric business profile while the Resort World Birmingham may need some time before showing meaningful results.

FY16-FY17 earnings estimates upgraded. While keeping other key assumptions unchanged, we fine-tune our assumptions for: (i) higher interest income, and (ii) lower GENP earnings on lower FFB growth by 8%, resulting in a 4%/1% upgrade in FY16/FY17 earnings estimates.

Keep MARKET PERFORM. Share price of GENTING has declined 14% since we downgraded the stock from OUTPERFORM in early April to current level which we believe is a more reasonable level. With unchanged 20% holding company discount to the SoP valuation, our new price target is reduced to RM9.23/share from RM10.04/share as the valuation for GENS has declined 12% and 6% for GENP since then. Risks to Our MARKET PERFORM call are poorer luck factor and sustained decline in CPO prices.

Source: Kenanga Research - 25 May 2016